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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 250 added, 265 removed, 271 unchanged (66% of the section changed)

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(Tables present dollars in millions, except per-share data)

Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to our company's results of operations and financial position.

This discussion and analysis should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." Certain statements in this Item 7 constitute forward-looking statements.

Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, "Risk Factors," may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements.

EXECUTIVE OVERVIEW

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Financial Results

The following table summarizes our key operating results:

Year Ended December 31 Percent Change

The following table summarizes certain financial information:

Year Ended December 31,

Percent Change

Revenue $ 34,124.1 $ 28,541.4 20

Gross margin 21,911.6 21,005.6 4

Gross margin as a percent of revenue 76.8 % 74.2 %

Research and development $ 7,190.8 $ 6,930.7 4

Marketing, selling, and administrative 6,440.4 6,431.6 —

Acquired in-process research and development (IPR&D) and development milestones 908.5 970.1 (6)

Asset impairment, restructuring, and other special charges 244.6 316.1 (23)

Other—net, (income) expense 320.9 201.6 59

Net income 5,240.4 6,244.8 (16)

Earnings per share - diluted 5.80 6.90 (16)

Revenue increased in 2022 driven by increased volume, largely offset by lower realized prices and the unfavorable impact of foreign exchange rates.

Research and development expenses increased in 2022, driven primarily by higher development expenses for late-stage assets, partially offset by lower development expenses for COVID-19 antibodies and the favorable impact of foreign exchange rates.

Marketing, selling, and administrative expenses in 2022 remained relatively flat compared to 2021 as increased costs associated with launches of new products and indications were offset by the favorable impact of foreign exchange rates.

The following highlighted items affect comparisons of our 2022 and 2021 financial results:

Acquired IPR&D and Development Milestones (Note 3 to the consolidated financial statements)

• We recognized $908.5 million of acquired IPR&D and development milestones that included the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor and a purchase of a Priority Review Voucher.

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

• We recognized charges of $244.6 million primarily related to an intangible asset impairment for GBA1 Gene Therapy (PR001) due to changes in estimated launch timing.

Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)

• We recognized $410.7 million of net investment losses on equity securities.

Cost of Sales (See Note 6 to the consolidated financial statements)

• We recognized a net inventory impairment charge related to our COVID-19 antibodies of $339.7 million.

As part of our response to the COVID-19 pandemic, and at the request of the United States (U.S.) and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world.

As the COVID-19 pandemic evolved during 2021, we incurred a net inventory impairment charge primarily due to the combination of changes to demand from U.S.

and international governments, including changes to our agreement with the U.S.

government, and near-term expiry dates of COVID-19 antibodies.

Acquired IPR&D and Development Milestones (Note 3 to the consolidated financial statements)

• We recognized $970.1 million of acquired IPR&D and development milestones that included charges resulting from business development transactions with Foghorn Therapeutics Inc.

(Foghorn), Rigel Pharmaceuticals, Inc.

(Rigel), and Precision Biosciences, Inc.

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

• We recognized charges of $316.1 million primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo Oncology, Inc.

(Loxo), an intangible asset impairment resulting from the sale of the rights to Qbrexza ® , as well as acquisition and integration costs associated with the acquisition of Prevail Therapeutics Inc.

Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)

• We recognized a debt extinguishment loss of $405.2 million related to the repurchase of debt.

• We recognized $176.9 million of net investment gains on equity securities.

Revenue increased in 2023 driven by increased volume and higher realized prices.

The increase in revenue in 2023 was primarily driven by sales of Mounjaro ® , Verzenio ® , and Jardiance ® , as well as the sales of the rights for the olanzapine portfolio, including Zyprexa ® , and for Baqsimi ® , partially offset by the absence of revenue from COVID-19 antibodies and lower sales of Alimta ® following the entry of multiple generics in the first half of 2022.

Net income and earnings per share decreased in 2023, driven primarily by higher acquired in-process research and development (IPR&D) charges and increased research and development expenses, marketing, selling, and administrative expenses, and income taxes, partially offset by increased revenue.

See "Results of Operations" for additional information.

Late-Stage Pipeline

Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines.

Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative medicines.

We currently have approximately 50 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.

The following certain new molecular entities (NMEs) are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have received regulatory approval in the U.S., Europe, or Japan.

The following table reflects the status of certain NMEs, including certain other developments, up to the time of the filing of this Annual Report on Form 10-K:

Compound Indication Status Developments

Basal Insulin-Fc Type 1 and 2 diabetes Phase III Phase III trials initiated in 2022 and 2023.

ANGPTL3 siRNA Cardiovascular disease Phase II Phase II trial initiated in 2022.

LP(a) Inhibitor Cardiovascular disease Phase II Phase II trial initiated in 2022.

LP(a) siRNA Cardiovascular disease Phase II Phase II trial initiated in 2022.

Orforglipron Obesity Phase II Phase II trials were recently completed.

Type 2 diabetes

Retatrutide Obesity Phase II Phase II trials were recently completed.

Type 2 diabetes

The following select new molecular entities (NMEs) and new indication line extension (NILEX) products are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have recently received regulatory approval in the United States (U.S.), European Union (EU), or Japan.

The table reflects the status of these NMEs and NILEX products, including certain other developments, up to the time of the filing of this Annual Report on Form 10-K:

Compound Indication/Study

Status Developments

Diabetes, Obesity, and Other Cardiometabolic Diseases

Empagliflozin (Jardiance) (1)

Chronic kidney disease Approved Approved in the U.S.

and the EU in 2023.

Submitted in Japan in 2022.

Tirzepatide (Mounjaro, Zepbound ® )

Obesity Approved Approved in the U.S.

and the EU in 2023.

Phase III trials are ongoing.

Cardiovascular outcomes in type 2 diabetes

Phase III trial is ongoing.

Heart failure with preserved ejection fraction Phase III Phase III trial is ongoing.

Morbidity and mortality in obesity

Phase III trial is ongoing.

Obstructive sleep apnea (OSA)

Phase III Granted U.S.

Food and Drug Administration (FDA) Fast Track designation (2) .

Phase III trial is ongoing.

Phase II trial initiated in 2023.

Nonalcoholic steatohepatitis Phase II Announced in 2024 that a Phase II trial met its primary endpoint.

Insulin Efsitora Alfa Type 1 and type 2 diabetes Phase III Phase III trials are ongoing.

Orforglipron Obesity Phase III Phase III trials initiated in 2023.

Type 2 diabetes Phase III Phase III trials initiated in 2023.

Retatrutide Obesity, osteoarthritis, OSA

Phase III Phase III trials initiated in 2023.

Type 2 diabetes Phase II Phase II trial was completed.

Bimagrumab Obesity Phase II Acquired in the acquisition of Versanis Bio, Inc.

(Versanis) in 2023.

Phase II trial is ongoing.

Lepodisiran Cardiovascular disease Phase II Phase II trial is ongoing.

Mazdutide Obesity Phase II Phase II trial initiated in 2023.

Muvalaplin Cardiovascular disease Phase II Phase II trial is ongoing.

Solbinsiran Cardiovascular disease Phase II Phase II trial is ongoing.

Volenrelaxin Heart failure Phase II Phase II trial initiated in 2023.

Compound Indication/Study

Status Developments

Lebrikizumab (3)

Atopic dermatitis Submitted Submitted in the U.S.

and Europe in 2022.

Atopic dermatitis Approved Approved in the EU in 2023 and in Japan in 2024.

Submitted in the U.S.

We received a complete response letter from the FDA in 2023.

We anticipate regulatory action by the end of 2024.

Phase III trials are ongoing.

Mirikizumab Ulcerative colitis Submitted Submitted in the U.S., Europe, and Japan in 2022.

Crohn's Disease Phase III Phase III trials are ongoing.

BTLA MAB Agonist Systemic lupus erythematosus Phase II Phase II trial initiated in 2022.

CXCR1/2 Ligands Monoclonal Antibody Hidradenitis suppurativa Phase II Phase II trial is ongoing.

Mirikizumab Crohn's Disease Phase III Announced in 2023 that a Phase III trial met the co-primary and all major secondary endpoints compared to placebo.

Phase III trials are ongoing.

DC-806 Psoriasis Phase II Acquired in the acquisition of DICE Therapeutics, Inc.

(DICE) in 2023.

Phase II trial is ongoing.

Eltrekibart Hidradenitis suppurativa Phase II Phase II trial is ongoing.

KV1.3 Antagonist

Psoriasis Phase II Phase II trial initiated in 2024.

(RIPK1 inhibitor) Rheumatoid arthritis Phase II Phase II trial initiated in 2023.

Peresolimab Rheumatoid arthritis Phase II Phase II trial is ongoing.

Rezpegaldesleukin Systemic lupus erythematosus Phase II Phase II trial is ongoing.

Compound Indication Status Developments

Donanemab Early Alzheimer's disease Complete Response Letter Granted U.S.

Food and Drug Administration (FDA) Breakthrough Therapy designation (2) .

Submitted in the U.S.

in 2022 under the accelerated approval pathway.

In January 2023, the FDA issued a complete response letter for the accelerated approval submission.

Ucenprubart Atopic dermatitis Phase II Phase II trial initiated in 2023.

Donanemab Early Alzheimer's disease Submitted Submitted for approval in the U.S., the EU, and Japan in 2023.

Granted FDA Breakthrough Therapy designation (4) .

Phase III trials are ongoing.

Preclinical Alzheimer's disease Phase III Phase III trial is ongoing.

Remternetug Early Alzheimer's disease Phase III Phase III trial initiated in 2022.

Solanezumab Preclinical Alzheimer's disease Phase III Phase III trial is ongoing.

GBA1 Gene Therapy (PR001) Parkinson's disease Phase II Granted FDA Fast Track designation (3) .

Remternetug Early Alzheimer's disease Phase III Phase III trial is ongoing.

GBA1 Gene Therapy Gaucher disease Type 1 Phase II Phase II trial initiated in 2023.

Parkinson's disease Phase II Granted FDA Fast Track designation (2) .

Phase II trial is ongoing.

GRN Gene Therapy (PR006) Frontotemporal dementia Phase II Granted FDA Fast Track designation (3) .

GRN Gene Therapy Frontotemporal dementia Phase II Granted FDA Fast Track designation (2) .

Phase II trial is ongoing.

O-GlcNAcase Inh Alzheimer's disease Phase II Phase II trial is ongoing.

P2X7 Inhibitor Pain Phase II Phase II trials initiated in 2022.

OTOF Gene Therapy

Phase II Phase II trial initiated in 2024.

P2X7 Inhibitor Pain Phase II Phase II trials were completed.

SSTR4 Agonist Pain Phase II Phase II trials are ongoing.

TRPA1 Antagonist Pain Phase II Phase II trials are ongoing.

Compound Indication/Study

Status Developments

Pirtobrutinib

(Jaypirca TM )

Mantle cell lymphoma Approved (4)

(Jaypirca ® )

Chronic lymphocytic leukemia Approved (5)

FDA granted accelerated approval (5) in the U.S.

in January 2023.

Phase III trial is ongoing.

Chronic lymphocytic leukemia Phase III Phase III trials are ongoing.

B-cell malignancies Phase II Phase II trial is ongoing.

Selpercatinib (Retevmo ® )

Lung cancer Approved (4)

Phase III trials are ongoing.

Thyroid cancer Approved (4)

Mantle cell lymphoma Approved (5)

FDA granted accelerated approval (5) in the U.S.

Approved in the EU in 2023.

Submitted in Japan in 2023.

Phase III trial is ongoing.

Imlunestrant Adjuvant Breast Cancer Phase III Phase III trial initiated in 2022.

Imlunestrant Adjuvant breast cancer Phase III Phase III trial is ongoing.

ER+HER2- metastatic breast cancer Phase III Phase III trial is ongoing.

(1) In collaboration with Almirall, S.A.

(2) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint.

(3) Fast Track designation is designed to facilitate the development and expedite the review of medicines to treat serious conditions and fill an unmet medical need.

(4) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.

Our pipeline also contains several new indication line extension (NILEX) products.

The following certain NILEX products for use in the indication described are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have received regulatory approval in the U.S., Europe, or Japan.

The following table reflects the status of certain NILEX products, including certain other developments, up to the time of the filing of this Annual Report on Form 10-K:

Compound Indication Status Developments

Empagliflozin (Jardiance ® ) (1)

Chronic kidney disease Submitted Granted FDA Fast Track designation (2) .

Submitted in the U.S.

and Europe in January 2023.

Tirzepatide (Mounjaro ® )

Obesity Submission initiated Granted FDA Fast Track designation (2) in 2022.

Initiated a rolling submission in the U.S.

Phase III trials are ongoing.

Heart failure with preserved ejection fraction Phase III Phase III trials are ongoing.

Obstructive sleep apnea Phase III Phase III trial initiated in 2022.

Granted FDA Fast Track designation (2) in 2022.

Nonalcoholic steatohepatitis Phase II Phase II trial is ongoing.

Abemaciclib (Verzenio ® )

Olomorasib KRAS G12C-mutant NSCLC Phase II Phase II trial initiated in 2023.

Prostate cancer

Phase III Phase III trials are ongoing.

In 2024, Phase III trials did not meet primary endpoints or were terminated for futility.

(1) In collaboration with Boehringer Ingelheim.

(2) Fast Track designation is designed to facilitate the development and expedite the review of medicines to treat serious conditions and fill an unmet medical need.

There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products, as well as a high rate of failure inherent in new drug discovery and development.

To bring a drug from the discovery phase to market can take over a decade and often costs in excess of $2 billion.

(3) In collaboration with Almirall, S.A.

(4) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint.

(5) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.

There are many difficulties and uncertainties inherent in pharmaceutical research and development, the introduction of new products and indications, business development activities to enhance or refine or product pipeline, and commercialization of our products.

There is a high rate of failure inherent in drug discovery and development.

To bring a product from the discovery phase to market takes considerable time and entails significant cost.

Failure can occur at any point in the process, including in later stages after substantial investment.

As a result, most funds invested in research programs will not generate financial returns.

New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, the application of pricing controls, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others.

As a result, most funds invested in research and development programs will not generate financial returns.

New product candidates that appear promising in development or prior to being acquired may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, failure to obtain placement on guidelines or recommendations published by third-party organizations that are commensurate with clinical data, the application of pricing controls, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of newer, better, or more cost-effective competitive products, difficulty or excessive costs to manufacture, insufficient infrastructure to support detection, diagnostic or other requisites for treatment, ineffectiveness in reaching healthcare professionals, including digitally given the increase in virtual engagements, or infringement of the patents or intellectual property rights of others.

We may also fail to allocate research and development resources efficiently, fail to pursue or invest sufficiently in product candidates or indications that may have been successful, or fail to optimally balance trial design, conduct, and speed to accomplish desired outcomes.

Regulatory agencies establish high hurdles for the efficacy and safety of new products and indications.

Delays, uncertainties, unpredictabilities, and inconsistencies in drug approval processes across markets and agencies can result in delays in product launches and lost market opportunity.

In addition, it can be very difficult to predict revenue growth rates of or variability in demand for new products and indications.

We manage research and development spending across our portfolio of potential new medicines.

Delay, uncertainty, unpredictability, and inconsistency in drug approval processes across markets and agencies can result in delays in product launches, lost market opportunities, impairment of inventories, and other negative impacts.

In addition, it can be very difficult to predict revenue growth rates of, or variability in demand for, new products and indications which in some cases leads to difficulty meeting product demand or, on the other hand, excess inventory and related financial charges.

We manage research and development spending across our portfolio of potential new medicines and indications.

A delay in, or termination of, any one project will not necessarily cause a significant change in our total research and development spending.

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We depend on patents or other forms of intellectual property protection for most of our revenue, cash flows, and earnings.

Following the expiration of patent exclusivity for Alimta ® in Europe and Japan in June 2021, we have faced generic competition that has rapidly and severely eroded revenue from prior levels, and we expect such competition will continue to erode revenues from current levels in these markets.

In addition, as a result of the entry of multiple generics in the U.S.

following the expiration of patent and pediatric exclusivity in the first half of 2022, we began facing, and expect to continue to face, generic competition that has rapidly and severely eroded revenue from prior levels, and we expect will continue to erode revenue from current levels.

This decline in revenue will continue to impact period-over-period financial results comparisons, particularly during the first half of 2023.

See Note 16 to the consolidated financial statements for a description of legal proceedings currently pending regarding certain of our patents.

Our compound patents for Humalog ® (insulin lispro) have expired in the U.S.

and major international markets, and we have also introduced lower-priced versions of Humalog as part of our insulin access and affordability solutions.

A competitor has a similar version of insulin lispro in the U.S.

and in certain European markets.

Due to the impact of competition and pricing pressure in the U.S.

and certain international markets, we expect that lower revenue for Humalog due to realized price decline will continue over time.

See Item 1, "Business—Patents, Trademarks, and Other Intellectual Property Rights" for additional discussion of the impacts of trends involving intellectual property on our business and results.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access

Reforms, including those that may stem from periods of economic downturn or uncertainty, or as a result of high inflation, emergence or escalation of, and responses to, war or unrest (including the Russia-Ukraine war), or government budgeting priorities (including as exacerbated by the COVID-19 pandemic), may continue to result in added pressure on pricing and reimbursement for our products.

Reforms, including those that may stem from political initiatives, periods of uneven economic growth or downturns, or as a result of high inflation, the emergence or escalation of, and responses to, international tension and conflicts, or government budgeting priorities, are expected to continue to result in added pressure on pricing and reimbursement for our products.

Global concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate and action, as well as worldwide cost containment efforts by governmental authorities.

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government enacted the Inflation Reduction Act of 2022 (IRA).

Among other measures, the IRA will require the U.S.

Department of Health and Human Services to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D.

Generally, these government prices apply nine (medicines approved under a New Drug Application) or thirteen (medicines approved under a Biologics License Application) years following initial FDA approval and will be capped at a statutory ceiling price that is likely to represent a significant discount from average prices to wholesalers and direct purchasers.

It is too soon to tell how the U.S.

government will set these prices as the law specifies a ceiling price, but not a minimum or floor price.

One or more of our significant products may be selected, which would have the effect of accelerating revenue erosion prior to patent expiry.

Among other measures, the IRA requires the U.S.

Department of Health and Human Services (HHS) to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D.

Generally, these government prices apply nine years (for medicines approved under a New Drug Application) or thirteen years (for medicines approved under a Biologics License Application) following initial FDA approval and will be set at a price that is likely to represent a significant discount from existing average prices to wholesalers and direct purchasers.

While the law specifies a ceiling price, it does not set a minimum or floor price.

In August 2023, the HHS selected Jardiance, which is part of our collaboration with Boehringer Ingelheim, as one of the first ten medicines subject to government-set prices effective in 2026.

Given our product portfolio, we expect additional significant products will be selected in future years, which would have the effect of accelerating revenue erosion prior to expiry of exclusivities.

The effect of reducing prices and reimbursement for certain of our products would significantly impact our business and consolidated results of operations.

The establishment of payment limits or other restrictions by drug affordability review boards and other state level actors would similarly impact us.

Other IRA provisions provide for rebate obligations on drug manufacturers that increase prices of Medicare Part B and Part D medicines at a rate greater than the rate of inflation and Part D benefit redesign that includes replacing the Part D coverage gap discount program with a new manufacturer discounting program.

Other IRA provisions require drug manufacturers to provide rebates for Medicare Part B and Part D medicines under certain circumstances.

Also, the Part D benefit redesign will replace the Part D Coverage Gap Discount Program with a new manufacturer discount program.

Manufacturers that fail to comply with the IRA may be subject to various penalties, including civil monetary penalties, which could be significant.

The IRA takes effect progressively starting in 2023, with the first government-set prices effective in 2026.

The IRA may meaningfully influence our business strategies and those of our competitors.

In particular, the nine-year timeline to set prices for medicines approved under a new drug application may reduce the attractiveness of investment in small molecule innovation.

The implications to us of a competitor's product being selected for price setting are also uncertain.

Provisions of the IRA may be subject to legal challenges or other reformation, and the full impact of the IRA on our business and the pharmaceutical industry remains uncertain.

Additional policies, regulations, legislation, or enforcement, including those proposed and/or pursued by the U.S.

Congress, the current U.S.

presidential administration, and regulatory authorities worldwide, could adversely impact our business and consolidated results of operations.

The IRA has and will meaningfully influence our business strategies and those of our competitors.

In particular, the nine-year timeline to set prices for medicines approved under a new drug application reduces the attractiveness of investment in small molecule innovation.

The IRA can cause changes to development approach and timing and investments at-risk.

The full impact of the IRA on our business and the pharmaceutical industry, including the implications to us of a competitor's product being selected for price setting, remains uncertain.

Additional policies, regulations, legislation, or enforcement, including those proposed or pursued by the U.S.

Congress, the U.S.

executive branch, and regulatory authorities worldwide, could adversely impact our business and consolidated results of operations.

Consolidation and integration of private payors and pharmacy benefit managers in the U.S.

has also significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price or rebate concessions and pharmacy reimbursement rates.

Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, courts, or private payers, such as the Centers for Medicare & Medicaid Services' national coverage determination for monoclonal antibodies for the treatment of Alzheimer's Disease, may adversely impact our business and consolidated results of operations.

We expect that these actions may intensify and could particularly affect certain products, such as insulin, as governments manage and emerge from the COVID-19 pandemic, which could adversely affect our business.

In addition, we are engaged in litigation and investigations related to our 340B program and access to insulin that, if resolved adversely to us, could negatively impact our business and consolidated results of operations.

We expect that these actions may intensify and could particularly affect certain products, which could adversely affect our business.

In addition, we are engaged in litigation and investigations related to our 340B program, access to insulin, pricing, product safety, and other matters that, if resolved adversely to us, could negatively impact our business and consolidated results of operations.

It is not currently possible to predict the overall potential adverse impact to us or the general pharmaceutical industry of continued cost containment efforts worldwide.

In addition, regulatory issues concerning compliance with current Good Manufacturing Practices, quality assurance, evolving standards, and increased scrutiny around excipients and potential impurities such as nitrosamines, and similar regulations and standards (and comparable foreign regulations and standards) for our products can lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in new product approvals or line extensions or supplemental approvals of current products pending resolution of the issues, and reputational harm, any of which would adversely affect our business.

In addition, regulatory issues concerning compliance with current Good Manufacturing Practices, quality assurance, safety signals, evolving standards, and increased scrutiny around excipients and potential impurities such as nitrosamines, and similar regulations and standards (and comparable foreign regulations and standards) for our products in some cases lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, inability to realize the benefit of capital expenditures, or delays or denials in new product approvals, line extensions or supplemental approvals of current products pending resolution of the issues, or other negative impacts, any of which result in reputational harm or adversely affect our business.

Moreover, increased focus on business combinations across industries and jurisdictions can lead to impediments to the completion of business combinations.

See Item 1, "Business—Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access" and Note 16 to the consolidated financial statements for additional information.

See Item 1, "Business—Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access," Item 1A, "Risk Factors," and Note 16 to the consolidated financial statements for additional information.

Product Supply

We have faced challenges, and expect to continue to face challenges, meeting strong demand for our incretin products, including due to the limited and fluctuating availability of competitor therapies.

In the U.S., given very strong uptake of Mounjaro following its launch in the U.S.

for type 2 diabetes in the second quarter of 2022, and as demand for Trulicity ® has remained strong, we have experienced intermittent delays in fulfilling certain U.S.

orders for these products.

Outside the U.S., we have implemented certain actions to minimize the impact on existing Trulicity patients, but we expect to continue to experience intermittent disruptions in our supply of Trulicity in international markets.

We anticipate tight supplies of our incretin products will persist until additional manufacturing capacity is operationalized.

We expect additional internal and contracted manufacturing capacity will become fully operational around the world in the next several years, with significant expansion in 2023, as part of our ongoing efforts to meet the significant demand for our incretin medicines.

We have faced challenges, and expect to continue to face challenges, meeting strong demand for our incretin products.

In the U.S., given the strong uptake of Mounjaro, the recent launch of Zepbound, and continuing demand for Trulicity ® , we have experienced intermittent delays in fulfilling certain orders for incretin products.

Outside the U.S., we have implemented actions to manage demand amid tight supply, including measures to minimize impact to existing Trulicity patients.

We have also progressed efforts to bring tirzepatide to patients via different delivery presentations outside the U.S., such as single-use vials and multi-use pens.

We expect to continue to experience disruptions in our supply of incretin products and for demand and supply considerations to influence the timing of tirzepatide launches in new markets, if approved.

We anticipate tight supplies of our incretin products will persist while additional manufacturing capacity is operationalized.

We expect additional internal and contracted manufacturing capacity will become fully operational around the world in the next several years as part of our ongoing efforts to meet the significant demand for our incretin medicines.

For example, in 2023 we began production at our Research Triangle Park site in North Carolina and expect to continue significant capacity expansion over time as we increase production at this site and others.

We are subject to income taxes and various other taxes in the U.S.

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therefore, changes in both domestic and international tax laws or regulations have affected and may affect our effective tax rate, results of operations, and cash flows.

In 2017, the U.S.

enacted the Tax Cuts and Jobs Act (the 2017 Tax Act), which contained a provision that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022.

Previously, these expenses could be deducted in the year incurred.

The implementation of this provision increased our cash payments of income taxes by approximately $1.20 billion in 2022.

While the implementation of this provision will continue to increase our cash payments of income taxes, the increase will moderately decrease from 2022 levels over the five-year amortization period.

and countries around the world are actively proposing and enacting tax law changes.

Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Co-operation and Development and the European Commission could influence tax laws in countries in which we operate.

Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Co-operation and Development (OECD) and the European Commission could influence tax laws in countries in which we operate.

Tax authorities in the U.S.

and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions.

and other jurisdictions in which we do business routinely examine our tax returns and are expected to increase their scrutiny of cross-border tax issues.

Changes to existing U.S.

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and other jurisdictions could adversely impact our future consolidated results of operations and cash flows.

Foreign Currency Exchange Rates and Other Impacts

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S.

dollar against the euro, Japanese yen, and Chinese yuan.

While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on our consolidated results of operations in any given period.

During the year ended December 31, 2022, revenue was unfavorably impacted by 3 percent due to foreign exchange rates.

While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these rates have, and we currently expect in the near-term future will, adversely impact our consolidated results of operations and cash flows.

In addition, cost inflation, the strain on global transportation, logistics, and labor markets (including as exacerbated by the COVID-19 pandemic and the emergence or escalation of, and responses to, war or unrest, including the Russia-Ukraine war), global economic downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials have had, and may continue to have, a number of impacts on our business, including increased costs and disruptions in the supply of our medicines.

In response to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Framework), which set forth a two-pillar solution to reform the international tax framework, and the EU's adoption of Directive 2022/2523 (known as "Pillar Two") (Directive) within the EU to implement the Framework, multiple countries, both within and outside of the EU, have enacted legislation that provides for a minimum level of taxation of multinational companies.

The Directive required EU member states to enact legislation effective for years beginning on or after December 31, 2023.

For certain provisions within the Framework, the OECD published guidance during 2023 that extends the effective dates for enactment.

While we expect an increase in future years’ tax expense as a result of the global minimum tax, we do not anticipate a material impact to our 2024 consolidated results of operations.

Our assessment of the impact for 2024 and subsequent years could be affected by legislative guidance, future enactment of additional provisions within the Pillar Two framework, and U.S.

tax changes scheduled to occur in 2026 as part of the Tax Cuts and Jobs Act (2017 Tax Act).

A bipartisan tax bill, the Tax Relief for American Families and Workers Act, was passed by the U.S.

House of Representatives in January 2024.

The bill contains certain business tax provisions including the retroactive repeal for 2022 and 2023 and deferral of the requirement to capitalize U.S.

research and development expenses for tax purposes that was a provision enacted in the 2017 Tax Act.

Uncertainty exists as to whether the bill will be enacted into law;

however, if the bill is enacted as currently drafted, we would expect our effective tax rate for 2024 to be moderately higher, and a net discrete tax detriment in the quarter of enactment related to 2022 and 2023.

In addition, we would expect a decrease in cash tax payments.

We invest in external research and technologies that we believe complement and strengthen our own efforts.

These investments can take many forms, including acquisitions, collaborations, investments, and licensing arrangements.

We view our business development activity as a way to enhance our pipeline and strengthen our business.

We view our business development activity as a way to enhance or refine our pipeline and strengthen our business.

For investments that were accounted for as asset acquisitions, we paid $3.94 billion in 2023 for acquired IPR&D primarily related to acquisitions of DICE, Versanis, Emergence Therapeutics AG (Emergence), and Mablink Biosciences SAS (Mablink).

For investments that were accounted for as business combinations, we paid $1.04 billion in 2023 primarily related to the acquisition of POINT Biopharma Global Inc.

See Note 3 to the consolidated financial statements for further discussion regarding our recent acquisitions.

COVID-19 Pandemic

As the COVID-19 pandemic evolves, we remain focused on protecting the health, safety, and well-being of our employees;

supporting the medical system and our communities;

and affordability of and access to our medicines.

At the outset of the COVID-19 pandemic, we also focused on researching, developing, and supplying COVID-19 therapies, although we do not currently expect significant further revenue attributable to treatments for COVID-19.

The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business and operations across markets to varying and fluctuating degrees, including as a result of cost inflation and strain on the global transportation, manufacturing, and labor markets, fewer in-person interactions among patients and healthcare providers and our employees with healthcare professionals in certain markets, pricing pressures, rebates, clawbacks, and other changes in reimbursement policies resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems, and risks related to our COVID-19 therapies.

The degree to which the COVID-19 pandemic could continue to affect us will depend on developments that are highly uncertain and beyond our knowledge or control.

For additional information, see Item 1A, "Risk Factors—Risk Related to Our Business—Public health outbreaks, epidemics, or pandemics, such as the COVID-19 pandemic, have adversely impacted and may in the future adversely impact our business and operations."

For discussion of risks related to business development activities, see Item 1A, "Risk Factors—Pharmaceutical research and development is very costly and highly uncertain;

we may not succeed in developing, licensing, or acquiring commercially successful products sufficient in number or value to replace revenues of products that have lost or will lose intellectual property protection or are displaced by competing products or therapies."

Foreign Currency Exchange Rates

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S.

dollar against the euro, Japanese yen, and Chinese yuan.

There is uncertainty in the future movements in foreign currency exchange rates, and fluctuations in these rates could adversely impact our consolidated results of operations and cash flows.

Other Factors

Other factors have had, and may continue to have, an impact on our consolidated results of operations.

These factors include cost and wage inflation, availability of adequate capacity in global transportation, supply chain and labor market complexities, international tension and conflicts, uneven economic growth or downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials.

See Item 1A, "Risk Factors" for additional information on risk factors that could impact our business and operations.

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Numbers may not add due to rounding.

the increase in volume in 2022 was primarily driven by Trulicity, Verzenio, Jardiance, Mounjaro, and Taltz ® , partially offset by decreased volume for Alimta, following the entry of multiple generics in the first half of 2022.

the decrease in realized prices was primarily driven by Humalog, due to a list price reduction of insulin lispro injection and unfavorable segment mix, and Trulicity and Basaglar ® , due to unfavorable segment mix and higher contracted rebates.

In addition, the decrease in realized prices of Humalog was partially offset by changes to estimates for rebates and discounts in 2021.

the increase in volume in 2023 was primarily driven by Mounjaro, Verzenio, Jardiance, Trulicity, Taltz ® , and Zepbound and $579.0 million from the sale of the rights for Baqsimi, partially offset by the absence of revenue from COVID-19 antibodies and decreased volume from Alimta following the entry of multiple generics in the first half of 2022.

the higher realized prices in 2023 were primarily driven by Mounjaro, due to decreased utilization of savings card programs as access continued to expand, partially offset by Trulicity, due to higher contracted rebates and unfavorable segment mix, as well as changes to estimates for rebates and discounts, and Humalog ® , primarily due to a one-time impact related to the implementation of list price decreases and unfavorable segment mix.

Outside the U.S.

the increase in volume in 2022 was primarily driven by Verzenio, Trulicity, Jardiance, Tyvyt ® , and Taltz, partially offset by a decrease in volume due to generic competition for Alimta and Cymbalta ® and decreased utilization of COVID-19 antibodies.

The decrease in realized prices outside the U.S.

was primarily driven by the impact of government pricing in China from National Reimbursement Drug List (NRDL) formulary for certain products, particularly Tyvyt and Verzenio, and volume-based procurement (VBP) for Humalog.

The following table summarizes our revenue activity in 2022 compared with 2021:

the increase in volume in 2023 was primarily driven by $1.45 billion from the sale of the rights for the olanzapine portfolio, including Zyprexa, as well as increased volume for Verzenio and Jardiance.

Outside the U.S.

the lower realized prices in 2023 were primarily driven by a new supply arrangement associated with the sale of the rights for the olanzapine portfolio and lower realized prices from Trulicity, Verzenio, and Humalog.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product in 2023 compared with 2022:

Year Ended December 31,

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Trulicity $ 5,433.3 $ 1,699.2 $ 7,132.6 $ 7,439.7 (4)

Mounjaro 4,834.2 328.9 5,163.1 482.5 NM

Verzenio 2,509.0 1,354.3 3,863.4 2,483.5 56

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1,600.4 1,144.2 2,744.7 2,066.0 33

1,191.9 868.7 2,060.6 2,453.0 (16)

COVID-19 antibodies (3)

2,008.9 14.7 2,023.5 2,239.3 (10)

79.4 1,615.4 1,694.8 336.9 NM

863.2 800.2 1,663.3 2,060.6 (19)

402.3 572.4 974.7 971.4 —

Alimta 543.7 384.0 927.7 2,061.4 (55)

Olumiant ® (4)

225.5 697.2 922.6 830.5 11

610.1 242.0 852.1 1,019.4 (16)

Basaglar ® (5)

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482.2 196.0 678.3 650.9 4

Baqsimi 645.7 31.9 677.6 139.3 NM

528.9 67.6 596.5 566.5 5

335.5 197.7 533.2 613.1 (13)

Mounjaro 366.6 115.9 482.5 — NM

26.1 355.3 381.5 587.3 (35)

Tyvyt — 293.3 293.3 418.1 (30)

Cymbalta 33.7 249.6 283.3 581.5 (51)

Alimta 72.9 144.6 217.5 927.7 (77)

Zepbound 175.8 — 175.8 — NM

COVID-19 antibodies (6)

— — — 2,023.5 NM

Other products 691.8 1,673.0 2,364.5 2,100.2 13

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(1) Jardiance revenue includes Glyxambi ® , Synjardy ® , and Trijardy ® XR.

(2) Zyprexa revenue includes sale of the rights for the olanzapine portfolio.

(3) Humalog revenue includes insulin lispro.

(3) COVID-19 antibodies include sales for bamlanivimab administered alone, for bamlanivimab and etesevimab administered together, and for bebtelovimab and were made pursuant to Emergency Use Authorizations (EUAs) or similar regulatory authorizations.

(4) Olumiant revenue includes sales for baricitinib that were made pursuant to EUA or similar regulatory authorizations.

Revenue of Trulicity increased 16 percent in the U.S., driven by increased demand, partially offset by lower realized prices due to unfavorable segment mix and higher contracted rebates.

(4) Olumiant revenue includes sales for baricitinib that were made pursuant to Emergency Use Authorization (EUA) or similar regulatory authorizations.

(5) Basaglar revenue includes Rezvoglar ® .

(6) COVID-19 antibodies include sales for bamlanivimab administered alone, for bamlanivimab and etesevimab administered together, and for bebtelovimab and were made pursuant to EUAs or similar regulatory authorizations.

Revenue of Trulicity decreased 4 percent in the U.S., driven by lower realized prices due to higher contracted rebates and unfavorable segment mix, as well as changes to estimates for rebates and discounts, partially offset by increased demand.

We have experienced and continue to expect intermittent delays fulfilling orders of Trulicity.

These delays have impacted and are expected to continue to impact volume.

Revenue outside the U.S.

increased 12 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and, to a lesser extent, lower realized prices.

We experienced intermittent delays in fulfilling certain U.S.

Trulicity orders during the second half of 2022.

Actions to manage strong demand across our incretin portfolio, including measures to minimize existing patient impact in international markets, also affected volume in 2022.

Revenue of Verzenio increased 98 percent in the U.S., primarily driven by increased demand.

decreased 3 percent, primarily driven by lower realized prices, partially offset by increased volume.

Volumes in international markets continue to be affected by actions we have taken to manage demand amid tight supply, including measures to minimize impact to existing patients.

Revenue of Mounjaro in the U.S.

in 2023 was $4.83 billion, compared to $366.6 million in 2022 , reflecting higher realized prices due to decreased utilization of savings card programs as access continued to expand and increased demand.

We have experienced and continue to expect intermittent delays fulfilling orders of certain Mounjaro doses given significant demand, which has affected and is expected to continue to affect volume.

Revenue of Verzenio increased 52 percent in the U.S., driven by increased demand, and, to a lesser extent, higher realized prices.

Revenue outside the U.S.

increased 61 percent, driven by increased demand, partially offset by lower realized prices primarily due to the impact of the NRDL formulary in China and the unfavorable impact of foreign exchange rates.

increased 63 percent, driven by increased demand, partially offset by lower realized prices and the unfavorable impact of foreign exchange rates.

Revenue of Taltz increased 6 percent in the U.S., driven by increased demand, partially offset by lower realized prices.

Revenue outside the U.S.

increased 13 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and lower realized prices.

increased 23 percent, driven by increased volume, partially offset by lower realized prices.

Revenue of Jardiance increased 34 percent in the U.S., primarily driven by increased demand.

Revenue outside the U.S.

increased 28 percent, primarily driven by increased demand, partially offset by the unfavorable impact of foreign exchange rates.

increased 31 percent, primarily driven by increased volume.

See Note 4 to the consolidated financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.

Revenue of Humalog decreased 10 percent in the U.S., primarily driven by lower realized prices due to a list price reduction of insulin lispro injection and unfavorable segment mix, partially offset by changes to estimates for rebates and discounts in 2021.

Revenue outside the U.S.

decreased 23 percent, primarily driven by lower realized prices due to the impact of VBP in China and the unfavorable impact of foreign exchange rates.

Due to the impact of competition and pricing pressure in the U.S.

and certain international markets, we expect that lower revenue for Humalog due to realized price decline will continue over time.

See "—Executive Overview—Other Matters—Patent Matters" for additional information.

Revenue of COVID-19 antibodies was $2.01 billion in the U.S.

during the year ended December 31, 2022, primarily due to bebtelovimab supplied to the U.S.

COVID-19 antibodies are not currently authorized for emergency use in the U.S.

We do not currently expect significant further revenue attributable to the treatment of COVID-19.

Revenue of Alimta decreased 56 percent in the U.S., primarily driven by decreased demand due to the entry of multiple generics in the first half of 2022.

Revenue outside the U.S.

decreased 54 percent, primarily driven by decreased demand due to generic competition.

Following the expiration of patent exclusivity for Alimta in Europe and Japan in June 2021, we have faced generic competition that has rapidly and severely eroded revenue from prior levels, and we expect such competition will continue to erode revenues from current levels in these markets.

In addition, as a result of the entry of multiple generics in the U.S.

See "—Executive Overview—Other Matters—Patent Matters" for additional information.

There was no worldwide revenue from COVID-19 antibodies in 2023, and we do not anticipate any future revenue from COVID-19 antibodies.

Gross Margin, Costs, and Expenses

Gross margin as a percent of revenue was 76.8 percent in 2022, an increase of 2.6 percentage points compared with 2021, primarily driven by a net inventory impairment charge related to our COVID-19 antibodies recognized in 2021 and the unfavorable effect of foreign exchange rates on international inventories sold in 2021.

Additionally, in 2022, favorable product mix, including the impact of lower sales of COVID-19 antibodies and Olumiant for the treatment of COVID-19, were offset by lower realized prices and increased expenses due to inflation and logistics costs.

Research and development expenses increased 4 percent to $7.19 billion in 2022, driven primarily by higher development expenses for late-stage assets, partially offset by lower development expenses for COVID-19 antibodies and the favorable impact of foreign exchange rates.

Marketing, selling, and administrative expenses remained relatively flat at $6.44 billion in 2022, as increased costs associated with launches of new products and indications were offset by the favorable impact of foreign exchange rates.

We have undertaken compensatory actions to improve retention and address wage inflation, which will increase compensation costs and impact our consolidated results of operations.

We recognized acquired IPR&D and development milestones of $908.5 million in 2022 that included the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor and a purchase of a Priority Review Voucher.

We recognized acquired IPR&D and development milestones of $970.1 million in 2021 that included charges resulting from business development transactions with Foghorn, Rigel, and Precision.

The following table summarizes our gross margin, costs, and expenses:

Year Ended December 31,

Percent Change

Gross margin $ 27,041.9 $ 21,911.6 23

Gross margin as a percent of revenue 79.2 % 76.8 %

Research and development $ 9,313.4 $ 7,190.8 30

Marketing, selling, and administrative 7,403.1 6,440.4 15

Acquired IPR&D

3,799.8 908.5 NM

Asset impairment, restructuring, and other special charges 67.7 244.6 (72)

Other—net, (income) expense (96.7) 320.9 NM

Income taxes 1,314.2 561.6 NM

Effective tax rate 20.1 % 8.3 %

NM - not meaningful

Gross margin as a percent of revenue in 2023 increased 2.4 percentage points compared with 2022, primarily driven by the absence of COVID-19 antibodies sales in 2023, higher realized prices, and the sales of the rights for the olanzapine portfolio and Baqsimi, partially offset by increased manufacturing expenses related to labor costs and investments in capacity expansion.

Research and development expenses increased 30 percent in 2023, primarily driven by development expenses for late-stage assets and additional investments in early-stage research.

Marketing, selling, and administrative expenses increased 15 percent in 2023, primarily driven by costs associated with launches of new products and indications, as well as compensation and benefits costs.

Acquired IPR&D charges recognized in 2023 primarily related to acquisitions of DICE, Versanis, Emergence, and Mablink and from a business development transaction with Beam Therapeutics Inc.

Acquired IPR&D charges recognized in 2022 included the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor and a purchase of a Priority Review Voucher.

See Note 3 to the consolidated financial statements for additional information.

We recognized asset impairment, restructuring, and other special charges of $244.6 million in 2022, primarily related to an intangible asset impairment for GBA1 Gene Therapy (PR001) due to changes in estimated launch timing.

We recognized asset impairment, restructuring, and other special charges of $316.1 million in 2021, primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo, an intangible asset impairment resulting from the sale of the rights to Qbrexza, as well as acquisition and integration costs associated with the acquisition of Prevail.

Other—net, (income) expense was expense of $320.9 million in 2022, primarily driven by net investment losses on equity securities.

Other—net, (income) expense was expense of $201.6 million in 2021, primarily driven by a debt extinguishment loss of $405.2 million related to the repurchase of debt, partially offset by net investment gains on equity securities.

Our effective tax rate was 8.3 percent in 2022, reflecting the favorable tax impact of the implementation of a provision in the 2017 Tax Act that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022, partially offset by the tax impact of the mix of earnings in higher tax jurisdictions.

Our effective tax rate was 9.3 percent in 2021, reflecting the favorable tax impacts of acquired IPR&D and development milestone charges, net investment gains on equity securities, and a net discrete tax benefit.

Asset impairment, restructuring, and other special charges recognized in 2022 primarily related to an intangible asset impairment for GBA1 Gene Therapy due to changes in estimated launch timing.

See Note 5 to the consolidated financial statements for additional information.

Other—net, (income) expense included net investment losses on equity securities of $20.2 million and $410.7 million for the years ended 2023 and 2022, respectively.

See Note 18 to the consolidated financial statements for additional information.

Our effective tax rate was 20.1 percent in 2023, compared with an effective tax rate of 8.3 percent in 2022.

The higher effective tax rate for 2023 was primarily driven by the tax impacts of non-deductible acquired IPR&D charges, the new Puerto Rico tax regime, and a lower net discrete tax benefit compared to 2022.

Operating Results—2022

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We believe our available cash and cash equivalents, together with our ability to generate operating cash flow and our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital requirements, which include:

• working capital requirements, including related to employee payroll, clinical trials, manufacturing materials, and taxes;

• working capital requirements, including related to employee payroll and benefits, clinical trials, manufacturing materials, and taxes;

• capital expenditures;

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• repayment of outstanding short-term and long-term borrowings;

• contributions to our defined benefit pension and retiree health benefit plans;

• milestone and royalty payments;

• potential business development activities, including acquisitions, collaborations, investments, and licensing arrangements;

• contributions to our defined benefit pension and retiree health benefit plans.

Our management continuously evaluates our liquidity and capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements.

As of December 31, 2022, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, leases, unfunded commitments to invest in venture capital funds, and retirement benefits (see Notes 11, 4, 14, 10, 7, and 15 to the consolidated financial statements).

As of December 31, 2023, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, business development activities, and the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, (see Notes 11, 4, 3, and 14 to the consolidated financial statements).

We anticipate our cash requirements related to ordinary course purchases of goods and services will be consistent with our past levels relative to revenues.

In 2022, we committed to invest over several years more than $2 billion in two new facilities in Lebanon, Indiana to manufacture existing and future products, more than $1 billion in a new facility in Concord, North Carolina to manufacture parenteral (injectable) products and devices, and more than 400 million euro in a new facility in Limerick, Ireland to expand our manufacturing network for biologic active ingredients.

In early 2023, we committed to invest an additional $450 million to expand manufacturing capacity at Research Triangle Park facility in Durham, North Carolina for additional parenteral filling, device assembly, and packaging capacity.

These investments, and other capital investments that support our operations, will result in higher capital expenditures for the next several years.

The 2017 Tax Act contained a provision that requires us to capitalize and amortize research and development expenses for tax purposes starting in 2022, whereas previously we could fully deduct these expenses in the year incurred.

The implementation of this provision increased our cash payments of income taxes by approximately $1.20 billion in 2022.

While the implementation of this provision will continue to increase our cash payments of income taxes, the increase will moderately decrease from 2022 levels over the five-year amortization period.

See "—Executive Overview—Other Matters—Tax Matters" for additional information.

Cash and cash equivalents decreased to $2.07 billion as of December 31, 2022, compared with $3.82 billion at December 31, 2021.

Net cash provided by operating activities was $7.08 billion in 2022, compared with $7.26 billion in 2021.

Capital expenditures were $3.45 billion during 2023, compared to $1.85 billion in 2022.

We are making investments in new facilities in Indiana, North Carolina, Alzey, Rhineland-Palatinate, Germany, and Limerick, Ireland to manufacture existing and future products.

These investments, and other capital investments that support our operations, have increased our capital expenditures and will result in higher capital expenditures over the next several years.

Cash and cash equivalents increased to $2.82 billion as of December 31, 2023, compared with $2.07 billion at December 31, 2022.

Net cash provided by operating activities decreased to $4.24 billion in 2023, compared with $7.59 billion in 2022.

The decrease in net cash provided by operating activities was primarily driven by an increase in cash payments for income taxes.

See Note 14 to the consolidated financial statements for additional information.

Refer to the consolidated statements of cash flows for additional information on the significant sources and uses of cash for the years ended December 31, 2023 and 2022.

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See Note 7 to the consolidated financial statements for additional information.

In December 2022, we acquired all shares of Akouos, Inc.

(Akouos) for a purchase price that included $12.50 per share in cash (or an aggregate of $327.2 million, net of cash acquired) plus one non-tradable contingent value right (CVR) per share.

The CVR entitles Akouos shareholders up to an additional $3.00 per share in cash (or an aggregate of approximately $122 million) payable, subject to certain terms and conditions, upon the achievement of certain specified milestones.

This acquisition was funded through cash on hand.

In 2023, we received cash proceeds of $1.60 billion for the sale of product rights, primarily related to the sales of the rights for the olanzapine portfolio, including Zyprexa, and Baqsimi.

See Note 4 to the consolidated financial statements for additional information.

As of December 31, 2022, total debt was $16.24 billion, a decrease of $646.1 million compared with $16.88 billion at December 31, 2021.

For investments that were accounted for as asset acquisitions, we paid $3.94 billion in 2023 for acquired IPR&D primarily related to acquisitions of DICE, Versanis, Emergence, and Mablink.

For investments that were accounted for as business combinations, we paid $1.04 billion in 2023 primarily related to the acquisition of POINT.

See Note 3 to the consolidated financial statements for additional information.

As of December 31, 2023, total debt was $25.23 billion, an increase of $8.99 billion compared with $16.24 billion at December 31, 2022.

See Note 11 to the consolidated financial statements for additional information.

In February 2024, we issued $1.00 billion of 4.500 percent fixed-rate notes due in 2027, $1.00 billion of 4.500 percent fixed-rate notes due in 2029, $1.50 billion of 4.700 percent fixed-rate notes due in 2034, $1.50 billion of 5.000 percent fixed-rate notes due in 2054, and $1.50 billion of 5.100 percent fixed-rate notes due in 2064, all with interest to be paid semi-annually.

We used, or will be using, the net cash proceeds from the offering of $6.45 billion for general business purposes, including the repayment of outstanding commercial paper, repayment of current maturities of long-term debt, and repayment of the $750.0 million of 5.000 percent fixed-rate notes due in 2026, which are callable at par beginning February 27, 2024.

As of December 31, 2023, we had a total of $7.42 billion of unused committed bank credit facilities, $7.00 billion of which is available to support our commercial paper program.

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The quarterly dividend was increased to $1.30 per share effective for the dividend to be paid in the first quarter of 2024, resulting in an indicated annual rate for 2024 of $5.20 per share.

Capital expenditures were $1.85 billion during 2022, compared to $1.31 billion in 2021.

In 2022, we repurchased $1.50 billion of shares under our $5.00 billion share repurchase program authorized in May 2021.

In 2023, we repurchased $750.0 million of shares under our $5.00 billion share repurchase program that our board authorized in May 2021.

As of December 31, 2023, we had $2.50 billion remaining under this program.

See Note 13 to the consolidated financial statements for additional information.

See "—Executive Overview—Other Matters—Patent Matters" for information regarding recent losses of patent protection.

Both domestically and abroad, we continue to monitor the potential impacts of the economic environment;

See "—Executive Overview—Other Matters—Patent Matters" for information regarding losses of patent protection.

Both domestically and abroad, we continue to monitor the potential impacts of the economic environment and international tension and conflicts;

the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers;

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In the normal course of business, our operations are exposed to fluctuations in interest rates, currency values, and fair values of equity securities.

These fluctuations impact the costs of financing, investing, and operating.

These fluctuations impact the costs of financing, investing, and operating our business.

We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments.

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dollar interest rates.

In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance.

As of December 31, 2022, substantially all of our total long-term debt carries interest at a fixed rate.

In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and in some cases we enter into interest rate derivatives to help maintain that balance.

As of December 31, 2023, all of our total long-term debt is at a fixed rate.

We have converted approximately 12 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.

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dollar at exchange rates that have fluctuated from the beginning of the period.

We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (primarily the euro, the Japanese yen, and Chinese yuan).

We in some cases enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (primarily the euro, Chinese yuan, and Japanese yen).

Our corporate risk-management policy outlines the minimum and maximum hedge coverage of such exposures.

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This sensitivity analysis does not consider the impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions.

Our fair value risk exposure relates primarily to our public equity investments and to equity investments that do not have readily determinable fair values.

Our fair value risk exposure relates primarily to our public equity investments and to our equity investments that do not have readily determinable fair values.

As of December 31, 2023 and 2022, our carrying values of these investments were $1.32 billion and $1.16 billion, respectively.

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For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates.

We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this report.

Our most critical accounting estimates have been discussed with our audit committee and are described below.

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In determining the appropriate accrual amount, we consider our historical rebate payments for these programs, as well as patient assistance program costs, by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.

Although we accrue a liability for revenue reductions related to these programs at the time we record the sale, the reduction related to that sale is typically paid up to six months later.

Because of this time lag, in any particular period our net product revenue may incorporate revisions of accruals for several periods.

Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales return, rebate, and discount accruals.

Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts.

Revenue recognized from collaborations and other arrangements includes our share of profits from the collaborations, as well as royalties, upfront and milestone payments we receive under these types of contracts.

Financial Statement Impact

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sales return, rebate, and discount liability balances, including managed care, Medicare, Medicaid, chargeback, and patient assistance programs:

(Dollars in millions) 2022 2021

Sales return, rebate, and discount liabilities, beginning of year $ 8,214.1 $ 6,161.6

4 unchanged sentences

(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1 percent of consolidated revenue for each of the years presented.

Increase in reduction of net sales in 2022 was primarily driven by our incretin products due to increase in our patient assistance programs and in volume of rebates for managed care, Medicare and Medicaid programs.

The increase in reduction of net sales in 2023 was primarily driven by our incretin products due to the increase in volume of rebates for managed care, Medicare, chargebacks, and Medicaid programs.

Litigation Liabilities and Other Contingencies

2 unchanged sentences

The factors we consider in developing our litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past matters, the nature of the product and the current assessment of the science subject to the litigation, as applicable, and the likelihood of settlement and current state of settlement discussions, if any.

In addition, we accrue for certain liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage.

In addition, we accrue for certain product liability claims incurred but not filed to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage.

We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance.

In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection.

Due to a very restrictive market for litigation liability insurance, we are self-insured for litigation liability losses for all our currently marketed products.

Due to a very restrictive market for liability insurance, we are predominantly self-insured for liability losses for all our currently and previously marketed products, as well as for litigation or investigations related to our pricing practices or other similar matters.

In addition to insurance coverage, we consider any third-party indemnification to which we are entitled or under which we are obligated.

With respect to our third-party indemnification rights, these considerations include the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.

The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.

The litigation accruals and environmental liabilities and the related estimated insurance recoverables are reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.

Background and Uncertainties

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The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill.

If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to acquired IPR&D and development milestones on our consolidated statement of operations at the acquisition date, and goodwill is not recorded.

If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to acquired IPR&D on our consolidated statement of operations at the acquisition date, and goodwill is not recorded.

See Note 3 to the consolidated financial statements for additional information.

5 unchanged sentences

The fair value of any contingent consideration liability that results from a business combination is primarily determined using a discounted cash flow analysis, as described in Note 7 to the consolidated financial statements.

Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, probability of technical success and the discount rate.

Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, probability of technical success, timing of the potential milestone event, and the discount rate.

Financial Statement Impact

2 unchanged sentences

Background and Uncertainties

We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable.

We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable.

We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value.

If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted.

Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount.

If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment.

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Annually, we determine the fair value of the plan assets in our defined benefit pension and retiree health benefit plans.

Approximately 50 percent of our plan assets are in hedge funds and private equity-like investment funds (collectively, alternative assets).

We value these alternative investments using significant unobservable inputs or using the net asset value reported by the counterparty, adjusted as necessary.

Inputs include underlying net asset values, discounted cash flows valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks.

Approximately 48 percent of our plan assets are in hedge funds and private equity-like investment funds (collectively, alternative investments).

We value these alternative investments primarily using net asset values (NAVs) reported by the counterparty and adjusted for known cash flows and significant events.

Financial Statement Impact

6 unchanged sentences

plans were adjusted by one year, our income before income taxes would be affected by $35.1 million.

plans, including Puerto Rico, represent approximately 85 percent of each of the total projected benefit obligation and total plan assets at December 31, 2022.

plans, including Puerto Rico, represent approximately 80 percent for total projected benefit obligation and 85 percent for total plan assets at December 31, 2023.

Adjustments to the fair value of plan assets are not recognized in pension and retiree health benefit expense in the year that the adjustments occur.

20 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis